In this week’s Forex Video I will show you how to use Fibonacci levels to find profit target zones. The currency pair that I will be using for this example will be the USD/JPY. This currency pair has been rising at a fast pace over the past few weeks. Ever since the FOMC rate statement, the U.S Dollar has continued to gain strength. As a result of the U.S Dollar gaining strength, the USD/JPY currency pair has remained strong. When you look at the charts now, it’s easy to see that MACD divergence is present and there may also be a hanging man type of pattern forming.
How To Use Our Fibonacci Tool To Identify Profit Zones.
As I illustrate in this Forex analysis video, the first step is to use our Fibonacci retracement tool to measure the retracement from the swing low to the swing high on the price chart.
Next, we want to look closely at the 61.8% Fibonacci level and the 78.8% Fibonacci level. I use the Fibonacci tool once again to measure from the secondary swing point that started the move higher. You may be looking at your price chart and asking which swing do I use? In my opinion, there are two options. The first option is the candle on November 3rd. The second option is the candle with the long wick, below the body of the candle that formed on November 9th. When in doubt I use both.
Now that you have drawn in your Fibonacci zones, you need to look left on the chart for potential market structure. When you scroll to the left on the price chart, you will see a prior swing high. You then need to use our region highlight y in NinjaTrader 8, or you can draw two horizontal lines. The first line should be at the high of the prior swing that was formed on July 21st, and the next horizontal line would be at the opening price for the same day. This is the candle body high. Now, you widen the zone to include three or more Fibonacci levels that are 61.8% and 78.6%.
Risk To Reward
Now that you have used our Fibonacci tool to identify profit target zones, the final step is to make sure that any trade that you are possibly considering meets our risk parameters. I always look for a 2:1 risk to reward ratio before placing a Forex trade. The reason for this is simple, by having 2:1 risk to reward ratio, I only have to be right 34% of the time to break even.
How To Use Fibonacci To Reduce Risk
I use my Fibonacci tool to reduce my risk in swing trades and sometimes in my day trades that are scalping type trades. Fibonacci helps me to reduce my risk by measuring the impulse move. I look at the 38.2% Fibonacci retracement. If the price touches the 38.2% level, then I move my stop-loss to break even plus a few pips. By following these steps, you will help yourself reduce stress and improve your ability to follow your rule set. I know this sounds very simple and the truth is, it is. Trading should be as simple as possible.
How To Use Fibonacci To Find Profit Zones And To Reduce Risk Forex Video